HIH collapse symptomatic of broader demise

Australia only has 40 companies generating more than $200 million a year offshore and HIH was one of them. Its collapse and the slump in the dollar are closely intertwined.

The company has millions of policyholders, 30,000 shareholders and more than $2 billion in annual premium income.

They are also the first Australian general insurer to collapse in 30 years, coming hard on the heels of the collapse of the entire Australian reinsurance industry.

Much has been written about the inadequate regulatory framework and HIH have long been an obstinate operator when it comes to satisfying interested observers.

This is a company that has banned analysts and issued stock exchange announcements abusing critical journalists.

But the collapse over the past year is not that surprising when you consider what has happened. It is just another example of inadequate information disclosure and incompetent management.

Australian companies just aren’t good enough to cut it on the global stage. HIH bought back into the Californian workers’ compensation business in January 1997 and got clobbered by a huge blowout in expenses and a massive dive in premium income.

This is hard to believe but California is one of the 10 biggest economies in the world and in 1995 workers’ compensation premium income totalled $US11billion. This dived to $US5.5 billion in 1997 but at the same time annual claim costs surged to $US8 billion. It was one of the world’s biggest insurance blood baths and HIH were in the thick of it.

You can’t blame Rodney Adler’s FAI Insurance for the California experience or the $150 million HIH have dropped playing the Lloyds of London insurance market. But FAI is still a big part of the reason that HIH has collapsed. Rodney coaxed them into paying $300 million in cash and shares for something that, with the benefit of hindsight, was worth about negative $200 million.

At the time of the last AGM in December, they had already written off $400million from FAI but there was still an incredible $438 million of FAI goodwill on the balance sheet

There was the occasional good story out of Rodney’s mess. FAI invested $475,000 into One.Tel and pulled out $60 million.

Rodney’s mates used to joke with him that FAI did not even have a claims department. The HIH team were shocked with what they found. FAI’s paper records did not accord with computer files and the level of reinsurance cover was not as high as expected. The corporate insurance and professional indemnity exposures were far worse than expected.

Accountants Arthur Anderson must be shaking in their boots at the moment. You see they were the auditors for both HIH and FAI.

Crikey was at the last ever FAI annual meeting in 1998 asking questions. We have also attended the last two HIH AGMs and would certainly not want to be the auditor who signed off on any of the accounts presented to these three meetings. The lawyers should be licking their chops.

Everyone is professing to be shocked by the $800 million loss that the HIH board announced on Friday after the provisional liquidator from KPMG presented a report to the board.

Clearly part of that loss has been confirmed by the fire sale prices HIH achieved selling its personal lines business to Allianz of Germany, its corporate business to QBE and its Australian workers’ compensation business to NRMA.

The saddest aspect of this story is the destruction of Australian capital and the ever-worsening performance of our companies on the global stage.

HIH’s former parent, the Swiss insurance giant Winterthur, sold its 51 per cent stake in June 1998 for $2.60 a share, collecting more than $500 million.

This was a direct transfer of wealth from Australia to Switzerland. Even canny sharemarket investors such as Gerry Harvey dropped $2.6 million on HIH.

After the Swiss were safely out of it, HIH then went on and destroyed the company by tipping about $500 million into California and Lloyds of London and dropping about $500 million on FAI.

HIH now has to be removed from the list of Australian companies generating more than $200 million a year in offshore markets. As the list below shows, Australia’s foreign investment performance is woeful with about 200 foreign companies generating more than $200 million a year in Australia but only 40 Australian companies doing likewise offshore.

As long as this remains the case, the dollar will continue to fall. HIH have destroyed a lot of Australia’s wealth and savings and that is what the world is rating when it prices the dollar.

Australian Companies Generating More Than $200M Overseas

Foreign Companies Generating More Than $200m In Australia Each Year